Overnight, a group of us were exchanging e-mails on the recent coordinated central bank action to provide European banks the funding being denied them by the markets. I haven’t been active on the e-mail chain, but I did find some of the commentary interesting.

I had a few comments of note I wanted to address, but here’s why I am writing this post:

“See NYT report which says clearly that the Fed did nothing to cooperate since the swap was already in place and would make no statement.”

When I read that I realised it was true. Look at the post yesterday from the BoE, “Additional US dollar liquidity-providing operations over year-end”. At the end of that press release, there is a link to the statement of every other central bank participating in the liquidity measure… except the Fed. In fact, I was looking for the Fed statement yesterday and didn’t find it. And that’s when I went to the BoE and saw they linked out to the other CB statements (sans Fed).

I think this is curious messaging because the US Treasury Secretary Timothy Geithner is over in Europe right now banging the table about the need for a Euro TARP. Cullen Roche calls it a Euro TALF. Whatever you call it, its a bailout; the original TALF sure was. Is this why the Fed went all radio silent?

I think that’s it exactly. The last post I wrote on The European Bank Bailout talks a lot about how unpopular these bailouts are; and since this is effectively a backdoor bank bailout, it makes sense that Ben Bernanke would want to keep mum, “to keep his powder dry” for QE3 as one of my friends e-mailed.

Here’s what’s happening:

European politicians are paralysed and are only doing enough to push off the day of reckoning. Muddling through means deepening crisis for the euro zone. Only when all other options have failed and the euro is about to break apart will the Europeans think about fiscal union and the like. I believe the sovereign debt crisis will deteriorate further for just this reason. And then we will just have to see what the politics of the individual countries in Euroland look like. If austerity brings the economy to a crawl and europopulism is well advanced, the euro will collapse. If not, the Europeans will push forward with greater integration.

In the interim that means bailouts, not just for sovereigns but for banks as well. You remember the dust-up over ECB Target2 liquidity? Well that was the beginning of the German revolt against the ECB’s quasi-fiscal policies. These moves, while absolutely necessary to prevent a Lehman-style crisis because of Euro politicians’ dithering, are politically charged. We now have seen two major ECB defections from Axel Weber and Juergen Stark. I think that there is even more discord behind the scenes.

But the Fed’s lack of commentary demonstrates that the other banks are just a cover. First, the Fed feels politically constrained due to its own machinations in the past and the likelihood it will engage in a muscular easing policy if and when the US economy double dips. It does not want to come under attack for this Euro bank activity. Second, dollar swap lines are already in place and have been extended. This policy didn’t have to be announced this way. It was only to calm markets and buy time.

Meanwhile Tim Geithner thinks the Euro-TALF bazooka is the right way to buy significantly more time. He is over urging the Europeans to take out the bazooka by leveraging up the EFSF ten to one in order to buy the Europeans $2 trillion euros of fire power. Now, that’s a bazooka.

If Stark and Weber resigned over this, what is the likelihood that the ECB is going to go for a Euro-bazooka $2 trillion TALF? I say it’s not going to happen. And that means, European politicians need to get that rabbit out of the hat soon because things will most certainly continue to deteriorate.

P.S. – It is now 154PM EDT and the Fed press release is STILL not there. You would think they would issue a press release if this really were a coordinated effort, right? Check here.

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

22 Comments

No, I am not surprised there is no announcements.
1/ I don’t think the FED/ECB lines are being hit. If I remember correctly the swap lines were put in place during the 08 crisis because NOBODY could find dollars. This time around it may just be a coordinated attack by hedgies and some banks on greek/BNP-SG/Euro in that order of defense lines.
2/ Even if it is just overnight lending until the panic subsides to avoid the stupid “blow up one night” a la lehman for BNP-SG it would be perceived as a bailout. A bailout of europe would be political suicide. I think they are just flying under radar.
3/ Last I read the ECB discount window was barely being hit, meaning the EU can still deal with this and doesn’t need to go tap the FED yet.
4/ Assuming greece will go. It means you need to defend banks. IN that case it means write-downs and then recapitalization. You have 2 ways to do that a/ Nationalization b/ TARP like.
5/ In other words G may have been here to discuss these options as you point out. That and PR of “stability”
6/ The ultimate goal of ‘bringing down the euro’ will not pass. I think the politicos understand that their line of defense is the banking system and will do anything to save it. Expect QE.
7/ Except EU cannot do QE, so maybe G’s trip is a way to bring QE through FX. In which case the dollar would tank (to the delight of the US econ). That part while highly speculative makes sense to me. The FED knows the US needs another round of QE if anything for dollar weakness.

Underlying all of this are the questions 1) who’s buying whom (via debt) or 2) who already owns everything? Which do you think it is; and if you think it’s the former, who are the parties? If you think it’s the latter, who really owns the Fed?

Is all of this really indicating that the whole thing is just a circle that is masking that the people’s taxes are going to cover the toxic waste many global banksters deliberately created? That’s what I’ve been saying about it all since well before 2008.

Its possible that the Fed is trying to play down its involvement in EZ dollar bailout because congressional republicans will place the fed under pressure/ scrutiny. Another attack on the fed should be pretty devastating IMO and it will happen before 2012 as a response to QE3 when it occurs.

Tom, this is about Euro banks having dollar liabilities and needing to roll them over. We saw the same thing with the Swiss and British banks too. The fact that the banks can’t roll their commercial paper shows that we have a liquidity crisis on our hands due to fears about solvency. The right way to deal with it is to pinpoint which institutions are in the worst shape and creating the crisis and recapitalize them. Doing so may involve nationalisation and taxpayer money. This is what governments are avoiding.

A cursory look at the balance sheet and exposure to greece of BNP clearly shows the “solvency” issue to be completely overblown. For BNP greece represents <10% tier 1 capital and it is indeed manageable by EFSF or just by doing nothing and relaxing requirements for a while. The current panic assumes complete 'contagion'.

I always wonder as to why "contagion" happens in the EU case. The contagion itself is market driven, and thus subject to panics. And the markets, specifically during the month of August, are driven by low volume and can be 'manipultated' by a few dedicated hedgies. I consider this panic largely manufactured, feeding on the scars of 08 still fresh in people's mind, driving the banks to a Lehman scenario in the imagination of people. The leap of faith the analysis does is always this 'contagion' part (Ed you do it too). Except as we all point out, the euro rolls are all in place and the dollar ones are already there and functioning. Personally I put my money (literally) on market manipulation.

Interestingly on the topic of "debt jubilee" wasn't it called as a necessity every "50 years" in the Bible? QE2/3 take an interesting dimension as a soft default in this context.

Austerity measures and poorly designed and executed easing/stimulus programs here in the US only exacerbate the problem with the European banks. If we were to get the US economic house in order, the banks in Europe would automatically be in much better shape vis-a-vis the dollar. Is that correct in your view?

Regardless though, it appears the Fed will continue pushing more money after bad. Obama sure can’t sell cleaning economic house. A Republican President would be even worse at it. What then can be used to recapitalize the banks?

Does the dollar have to crash before anyone wakes up?

It seems insane. Does the Fed have cards up its sleeve? Just printing more dollars isn’t some hidden tool. Can they buy all the bad debt and write it off without taxpayers being gored to death?

Why not declare a jubilee? Then the taxpayers wouldn’t be hurt at all. Hit the reset button.

I think the bankers and bond holders collecting interest in the form of taxes are the obstacle all the way around. It appears to be a class struggle, and the extreme upper-class controls most of the media where they keep nationalization and other approaches from being much discussed.

I’m fairly confident in saying that you know people such as William K. Black could have headed up a team back in 2009 that could have had the heavy lifting all done by now.

Thanks, Ed, for responding.

If you want me to post this on your blog post, don’t hesitate to say the word.

I’m using WordPress, but I just switched to DISQUS for comments. DISQUS syncs with my WordPress database too. I wonder if this Wordbooker would be compatible. I’ll have to check into it. Thanks for mentioning the WordPress-to-FB syncing aspect.

You are correct, Marc, about Jubilee. We need something akin to it, but we also need a solution so Jubilee isn’t needed again.

QE is necessary but only because structural integrity was lessened by those who knew that such de-regulation would position them so they could simply yell for help (as Henry Paulson did; he also physically got on his knees) and the flood gates of money flowing their way would be opened, which is exactly what happened.

Do QE right now, but demand as a central component that the system be taken back to the drawing board with the order that structural integrity be designed back in to the extent that the so-called business cycle is forever preempted. Remove all possibility that defaults (whether hard, soft, direct, or indirect) will ever be borne by the poor.

This primarily requires the de-linking of sovereign money from bonds. Never issue sovereign money as debt. Who is the sovereign, public or private? Right now, in terms of money issuance, it’s private. That’s an evil. The issuing governors are not serving with the informed consent of the whole people (the public). The money is not the people’s by way of their government or state.

The talk of Euro Bonds is exactly the wrong direction in this regard. The euro should be taken back to that proverbial drawing board and brought back out as a debt-free medium of exchange.

Even in the short run, the issuance of euros (and US dollars) should not be controlled by what is called finance capitalism but moved first to industrial (productive) capitalism with the view of ultimately and as quickly as possible, raising all boats with an ever-rising tide: no more “business cycle” for the crafty superrich to create at their demand when they have themselves exactly pre-positioned to gain the spoils.

United States Notes is the way to begin this in the US. Pegging the supply to real productivity is the way to avoid both monetary and price inflation and deflation. A constitutional amendment is required to handle the metals aspect that is now required by the Constitution.

All of this is absolutely doable. Humanity has the ability to handle the supply and measurements of the flow of funds and velocity, etc., in nearly real-time.

Now, the Austrian School will raise the issue of picking winners and losers, but a dollar or a euro spent is a vote and a vote via a ballot is also. The only difference is that the votes of the poor would count as much as the votes of the superrich, which currently is not the case.

The superrich do not have a larger say because they are more deserving by virtue of their having amassed money and material. Thinking that they do is to hold with the view that ethics is irrelevant, Social Darwinism is all that matters, and the best taker is evolutionarily destined to be the last being. Look at the problem with that outcome. The greatest monopolist has eaten everything and is left completely alone with nothing left to devour.

I think you mistake the super-rich with the banks. Yes the banks are in charge of money creation and yes you can always argue that they do a terrible job of allocating it. What the austrians will tell you is not only winners/losers but rather rampant corruption and I do NOT believe that principal collection should be left to governments seeking votes. Very simply such as system would stabilize at the governments promising “clean slates” at each election cycle.

I am intrigued by money not birthed as debt ever since I read it in the MMT litterature (someone close to Keen if I remember correctly, a Japanese researcher). It seemed interesting and clearly the first thing people should worry about is the tax banks levy on the process of money creation. There should definitely be a cost to it (re; winners/losers) but the interest is usury in bad times and leads to accumulation loops (andresen work again a keen connection).

In a sense QE does create these conditions. The yield curve is brought to zero (at least for banks) and flattened for everyone and it does constitute a certain ‘default’ from a economic standpoint.

I disagree that it is ‘doable’ to follow all the flows, at least certainly not today. In fact 08 has proven that a lot of the liquidity was hidden in derivatives and just materialized when the proverbial shit hit the fan. In other words you would have to reign in OTC derivatives trading or at least measure it in order to be able to truly capture “potential monetary’ levels created by the private sector. Good luck with that as along with perfectly valid uses of OTC derivatives (say balance sheet management by corporations) you have downright abuses (the whole AIG thing).

In any case, I want to think a bit more about the whole money sans debt thing, the role of bad debt (the money is STILL in circulation) etc

Yes, if I were to be suggesting that everyone who is superrich is likeminded about all of this, then that would be a mistake. Look at the difference between Buffet and the Koch brothers, for instance. I’m not for a moment suggesting that Warren Buffet is a paragon of virtue, but I do believe he really does think it is unfair that his secretary pays a higher percentage of her income on taxes than he does. I’m using the term superrich in very general terms. Even all bankers are not alike. The difference between the bankers running the Bank of North Dakota versus certain banks in Liechtenstein is nearly as night versus day.

I do believe that the greatest hidden power is concentrated in the hands of banking dynasties. So, I agree with you. However, I deliberately used the term superrich versus banker or bankster because so much of the banking system is commingled with the giant corporations and their masters. Would it be that the corporate masters would side against the banks. The equity markets are supposed to allow for that, but little happens.

I like much post-Keynesian material I’ve seen. It seems I came to most of my similar conclusions independently. They were original to me, but I wasn’t surprised to see that others had often thought the same thoughts. I’m also not surprised that it doesn’t have a huge following. It requires a great deal more in the way of abstract reasoning than the other “schools.”

You stated that “the interest is usury in bad times.” Of course, that’s the neo-definition. In my book the interest is always usury, and usury is always an unnecessary and even bad thing.

Yes, QE does create many of the negative conditions; and for the Keynesians, they just want to time things to head off overheating. I understand that; but again, it’s not only unnecessary, it’s bad. I’m not in the least advocating the laissez-faire approach though. I understand the Austrian concept of letting the weak fail so the stronger, better run and what have you, are the ones who remain standing offering superior goods and services.

However, I really don’t want money being the only vote or any vote at all for that matter. I’m a firm believer in sharing and democracy in the workplace and such. It’s called socialism and communism, but it can also be viewed as pushing capitalism down to the most widely dispersed level possible. I’ve never seen it stated that way before, but I believe it’s a valid way of viewing it. Rather than a few “owners,” there’s everyone. Then they decide together via equal says, and the best idea gets the nod – at least the idea that was put over the best with everyone having an equal say (discussions) going in and then decision (vote). To me, that would prevent a great deal of the corruption we see.

As for the “doable” issue, I can certainly see how you would interpret it the way you did. To clarify, let me say that I’m not suggesting that everything is in place. I’m saying that we have the know-how and technology. We could put it in place fairly quickly and easily if we could get beyond the blockade that is the bankster class.

Yes, as you said in so many words, transactions would have to be transparent. I am aware of the arguments for the original uses of derivatives. I must say though that that system has run amok (and on purpose), as I mentioned in the comments above.

Regardless though, if the money were United States Notes pegged to real and democratically decided projects (productive projects to bring forth what the whole people need and want), then what would be the need for swaps and the like? They’d be rendered moot.

The system we have, the neoliberal system, built on banking is retarding the development of humanity to such a degree that it boggles my mind. It is unbelievably shortsighted. Even the rich would be vastly better off being even or level with all others in a world unleashed from the constraints of private banking notes, lending, and usury.

By the way, United States Notes don’t require taxes. They can also be used to pay off the national debt. Let’s weed out the fraudsters first though.

If this is a duplicate comment, I apologize. It didn’t go through the first time.

Thanks for staying engaged. I am always wary of narratives with bad guys in economic matters, although I tend to agree with the general feeling expressed towards the banks. The simple reason is that I consider econ a study in complex system (network interactions with feedbacks) and can weave pretty much any story you like by following the connections and “spin”. You can blame banks, hedge funds, the rich, the government, the unions, regulation, deregulation, money birthed as debt, pretty much anyone that owns a house or wants to own a house etc etc.

That being said, the thing that we seem to focus on is the interest paid of ‘thin air’ money to the banking system. I think the problem is that it is a percentage, that the payment is an interest payment as a percentage of principal. If the payment was a fee say covering the cost of allocating the debt then it would be a lot more ‘fair’ than ‘interest payment’. But again, if that is the price of money then why would anyone pay interest on money coming from real savings. So the logical conclusion is that all money has to be lent on that flat ‘fee’ basis.

Capitalism has 2 main constructs: debt and equity. This would only leave equity and do away with debt entirely. it is essentially what some muslims abide to: you cannot charge interest. Convincing people in the USA that it is a good thing seems a little utopian.

To be clear, I am slowly reaching the conclusion that capitalism is adapted to growth economies, because it encourages the availability of funds at an interest. Even the recent emergence of china’s working class can be chalked up as a success of capitalism. It has (as the preferred distributed financing model of growth economies) lifted a good hundred millions out of abject poverty. Absent growth however, the debt component is choking and may have resulted in the evolutionary bit of wisdom that “debt jubilees” are a systemic necessity every 50 yrs.

Of course transformation of debt to equity is what folks like Roubini have been calling for, for the past 3 years. But in the case of a sovereign, what exactly IS equity in a sovereign? There is only debt as the financing instrument.

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